May 14, 2015 | By McCathern Law
A wave of construction defect law reform efforts has swept several states this year, driven by builder lobbying and court systems struggling under the stream of litigation from these laws. And the reform momentum may spread further as residential development kicks into high gear across the country, experts say.
In the past six months, at least five states — Colorado, Nevada, Arizona, Florida and Washington — have seen various bills that attempt to make it harder for homeowners to sue under existing construction defect laws. While the bills have met with mixed results, more efforts could sprout as developers and lawmakers push to get housing projects off the ground and time-draining, resource-consuming disputes out of the courts, experts say.
While the bills each have unique approaches, Kelli Hawley, a Los Angeles-based managing partner for McCathern Law who has been following the reform trends, said the measures generally are about “forcing the homeowners to be specific and define their construction defects. Everybody is focused on providing alternates to litigation and getting these out of the court.”
Many of the country’s existing construction defect laws were passed in the late 1990s and early 2000s in an effort to give new consumer protections to homeowners. But some builder attorneys and advocates say many of these laws overshot and allowed opportunistic homeowner plaintiffs to saddle developers with unnecessarily costly litigation, rather than work out solutions to problems.
“It was detrimental to the builders, it drove up housing prices, and it was hard for the builders to manage their risk,” Hawley said.
When the number of cases filed and claims made didn’t drop during the slowdown in development after the housing bubble burst, many developers began to focus their resources on the issue, according to experts. What has resulted is an almost unprecedented success in lobbying efforts across a number of states.
In February, Nevada Gov. Brian Sandoval signed into law a bill that limits the definition of a home defect, takes away attorneys’ fees in favorable judgments for a plaintiff and stops homeowners’ associations from bringing actions that don’t relate to common spaces, among several other measures. Dubbed the Homeowner Protections Act of 2015, A.B. 125 in turn demands that developers disclose certain information regarding owner-controlled insurance policies in a subcontractor’s deal.
Similarly, Arizona Gov. Doug Ducey in March signed H.B. 2578, which also repealed attorneys’ fee provisions and redefined what constitutes a construction defect. In Florida, the state House of Representatives has pushed forward H.B. 87, which would revise the term of when the completion of a building or improvement takes place, as well as put additional requirements on notices of claims. In Washington state, meanwhile, the proposed bill S.B. 5961 would require a professional inspection of any alleged defects.
One of the most closely watched reform efforts this year, however, took place in Colorado, where the third legislative proposal in three years failed to cross to the finish line. The buzz is that partisan politics in the Legislature’s leadership killed the bill.
The lawmakers backing these bills — which tend to skew Republican — and the developers lobbying for them contend that legislation to curb construction defect litigation is needed so that developers and insurers won’t be wary of taking a chance on new projects.
“The magnitude of the awards has really made insurance companies think twice about insuring,” said Amy Hansen, a Denver-based Polsinelli PC shareholder who works with developers setting up projects.
While legislation in Colorado has so far fizzled, the push has been gaining steam among state lawmakers, since condo development has all but vanished and the state is facing affordable housing issues, according to a Polsinelli team that has been working on the efforts.
The firm says anecdotal evidence suggests that about 85 percent of condominium projects with 100 units or more eventually face lawsuits under the construction defect law. And construction defect cases tend to be sprawling matters involving several parties and a variety of issues, which can severely tax the courts, experts note.
“It takes so much time; it is a strain on the courts and, quite frankly, a strain on the parties,” Hansen said.
However, some experts say that many of the current proposals are wrongfully attempting to impinge on consumer rights.
“I think it will continue to go on where you have pro-business [interests] lined up with the building industry, and it’s really a shame, because I think these homeowners are really going to suffer,” said Thomas E. Miller, founder and CEO of California-based construction defect boutique The Miller Law Firm.
Miller contends that most of the proposals don’t stack up to what is arguably the best-known template for construction defect law reform: California’s 2003 overhaul of its construction defect laws, including the Right to Repair Act.
“The comprehensive legislation has really stood up and stood the passage of time. What we’re seeing in other states is piecemeal attempts, not a comprehensive overhaul or a comprehensive piece of legislation. Some states are attacking the statute of limitations; other states are attacking some of the procedures, like the prelitigation process; some are attacking the standards,” Miller said, noting that he considers Nevada’s reforms to be the general exception.
California’s legislation helps builders and homeowners settle their differences before getting into court, according to attorneys from both sides of the table.
“I think you’re going to see more and more jurisdictions going this way because the builders have been more organized in seeking this reform after the perceived successes in the California system, and I think people are frustrated,” Hawley said.
She noted, however, that it has been hard to judge whether or not the reform has significantly helped push down the number of construction defect cases
State legislatures are not the only avenue the builders are using to seek change. While Colorado has so far failed to pass legislative reforms, the builder industry did score a key win the day after the most recent bill died. A Colorado appeals court ruled that a homeowner association could not amend an agreement with a developer to remove an existing arbitration provision that said the builder had to agree to any changes to the contract.
Polsinelli associate Richard Murray took the lead on writing an amicus brief in the case, Vallagio at Inverness Residential Condominium Association Inc. v. Metropolitan Homes Inc. et al., representing business interests.
“This [ruling] should alleviate some of the concerns with regard to whether arbitration will stand,” Warren said, noting that it could impact other courts and states that look at the decision.
It could also entice insurers to take another look at Colorado, Hansen said.
Legislative changes haven’t been written off entirely, however, in Colorado. The issue could continue to be “dealt with potentially at the local level and maybe even the state legislative level [again], as we try to get condos built in this new and growing economy,” Hansen said.
The states that have had bills chugging their way through legislatures tend to be those that see the most construction defect litigation, according to experts. Some contend the litigation has become a legal cottage industry akin to serial patent troll litigation, with several plaintiffs attorneys moving from state to state and filing waves of similar litigation to squeeze money out of developers, builders and the insurance industry.
“There is a sense that construction defect litigation has spread from hot spots to other hot spots,” Warren said.
And with the real estate market on an upswing that is enticing developers to put shovels in the ground again, other states may soon be grappling with the same issues as Colorado, according to Hansen.
–Editing by Kat Laskowski and Philip Shea.
Law360, New York (May 14, 2015, 4:22 PM ET) — http://www.law360.com/articles/626510/wave-of-construction-defect-law-reform-may-continue-